Case Law Summary - Need Benefit test for Services availed from Group entities - Indian Transfer Pricing Perspective

Dear Friends, please find the below case law for your reference in relation with the recent ruling of Mumbai ITAT for the relevance of Need-Benefit test for services availed from Associated Enterprises (AEs). This is a Mumbai ITAT judgement in case of Millward Brown Market Research Services India Pvt. Ltd. Click on the link for complete judgement file.

Assessee: Millward Brown Market Research Services India Private Limited

I.T.(TP) A. No. 932/Mum/2016

 Bench: Shamim Yahya (AM); Amarjit Singh (JM).

 Facts of the Case;

• Assessee is engaged in business of providing research based consultancy services; enabling clients to build strong brands. This mainly includes advertising / marketing / communications / media / brand equity research.
• Assessee and the group have set up a global and various regional units for availing centralized services; which are leveraged by agencies around the world.
• In relation with the same, the Assessee had received various services from its AEs (Information tech, operating management, Marketing and client communication.
• The AE has charged the company on the basis of cost (direct and indirect) plus 10% markup.
• The Assessee has adopted TNMM methodology to benchmark the aforesaid transaction.

TP Assessment Proceedings:

• The TPO asked the Assessee to submit documentary evidences to prove actual services were rendered to the Assessee and benefit derived therefrom.
• The Assessee in reply to the same provided various documents (writeup of services, email communications, presentations, screenshots, etc.)
• As per the Assessee it discharged the primary onus of furnishing information / documents required by the TPO.
• The TPO held that Assessee had not received any benefit; rejected the benchmarking study of the Assessee (where AE was taken as tested party) and contended that the Assessee also failed to draw a nexus between cost incurred and benefit received  by the Assessee.

DRP Proceedings

• The Assessee also submitted additional evidences; wherein the learned TPO rejected the evidences during the remand report to the DRP on the basis of above reasons.
• As per the DRP the benefit received by the Assessee is required to be proved; and confirmed the TPO’s decision considering the ALP of the transaction to be ‘Nil’.

ITAT Ruling

• The benefit test is to be applied by the AO and not by the TPO. Admittedly the TPO has exceeded the jurisdiction.
• The action of the TPO to determine the ALP as ‘NIL’ is not sustainable at all
• The authorities have totally erred in rejecting the documentary evidences filed by the Assessee on the ground that they do not prove benefit obtained by the Assessee.
• The services have been rendered is evident from the documentary evidences. The TPO was to benchmark the international transactions and compute ALP. Instead the TPO sat in shoes of AO and rejected the documents on the ground that they do not prove benefit teast.
• As per the ITAT There is no provision empowering the TPO to determine the ALP on estimation basis (nil in current case ), by entertaining doubts with regard to the business expediency and in the process stepping into the shoes of the AO for making disallowance under section 37(1) of the Act.
• Hence transfer pricing adjustment at nil fails on both counts. Firstly on the account of benefit test which is not to be applied by the TPO and secondly none of the method of benchmarking the international transaction as specified in section 92C has been applied.

Trust you have found it useful.